The cynical yet always insightful and often hilarious political/financial commentaries that once characterized the Insightful Pontificator can now be found at Mighty Quinn on Politics and Money. The Pontificator remains the reflective, often humorous, and always thought provoking repository of my musings on a multitude of other topics. Faith will be a major topic; believe (it) or not, faith provides plenty of grist for the piquant commentary Pontificator readers have come to expect.

Saturday, August 1, 2009

SOMEWHERE, (BE CERTAIN WITH) LINN BURTON IS SMILING

8/1/09

I have to admit that I was caught flat-footed on the details of the “cash for clunkers” program, perhaps because we were away so long and I was out of touch with the news. But most of the details of the program came out before we left, so I can only attribute my lack of detailed knowledge of the program that has had such a profound effect on an industry about which I purportedly have a degree of expertise to inattention, probably because of my concentration on my book. I also have to admit that I was flabbergasted by the phenomenal success of the program; it appears that, in cash for clunkers, we are observing, or have observed, that rarest of all species, a successful government program. As regular readers may suspect, I also have managed to find a dark cloud inside the silver lining of this program; this ability to find the downside few others detect and my surprise at the success of the program are related.

To understand my amazement at the success of the cash for clunkers program, one must understand what the program does: it puts a floor under used car prices. That floor depends on the step-up in fuel economy the participant achieves when he effectively trashes one’s car for a new one. (That step-up, in the case of “large light trucks,” can be as low as 1 mile per gallon, exposing as so much balderdash the argument that cash for clunkers is some kind of miracle elixir for either our dependence on foreign oil or for our environmental problems. This program sells cars, but doesn’t do much at all for the national fleet’s fuel economy.) Say the participant’s old car is worth $2,000 and she qualifies for the full rebate of $4,500. She effectively is getting a government subsidy of $2,500 for the purchase of a new car. $2,500 is nothing to denigrate, but does it make all that much difference when the participant is buying a $20,000, or even a $15,000, car? (Don’t pretend that one can buy much new car at all for less than $15,000, even, or perhaps especially, given the drain down in inventories, now. And I would be willing to bet that the price of the average new vehicle purchased under the program exceeds $20,000, and not by a few dollars.) How many buyers are that close on a car buying decision? How many could say “Gee, I could never in a million years afford $18,000 for a new car, but $15,500? Easy.” Apparently legions of buyers are in such a position, if we are to believe the apparent success of the program. Further, how many people could not get financed for $18,000 but are suddenly creditworthy for $15,500? What happened to the “credit crisis”? Was it all a figment of our collective imagination? Or is the Obama economic plan having a Merlinesque effect on our economy, making all our financial problems disappear? One wonders.

The dollar amount of the subsidy, of course, depends on the value of the trade-in and the step-up in mileage the participant achieves when he ditches his old friend for his new infatuation. We don’t yet know how much the average subsidy is. However, the Wall Street Journal informs its readers this morning that at one dealer, Vernie Jones Ford of Jasper, Georgia, the average value of the clunkers taken in was $4,200, making the maximum subsidy a mere $300. Jones is only one dealer, of course, and is unlikely to be reflective of conditions nationwide. However, if Jones’ experience is even remotely close to the nationwide experience, the numbers outlined in the last paragraph would be even more supportive of my amazement at the apparent success of the program and my ability to concentrate on its more malignant aspects.

When one gets down to it, the value of the program is not the dollars themselves, but the cash for clunkers boondoggle’s ability to draw people into showroom and get them thinking about buying cars. Indeed, many dealers report that people who found they didn’t qualify under the program’s rules wound up buying a new car anyway. In this sense, the program succeeded by playing on Americans’ natural inability to keep money in our pockets, or in our bank accounts. The Wall Street Journal reports, for example, that South Carolinian Mr. James Dunn, on the last day of his job, took his severance check and his 1989 pickup to Dodgeland of West Columbia in the Palmetto state to buy a new car because of the program and his “sudden optimism about the U.S. economy.” Mr. John Weiskirch, from parts unknown, or at least unreported by the Journal, is quoted as saying “I’m watching my 401(k) recover a little bit. I’m feeling like the Dow’s going over 10,000 and the NASDAQ’s going over two (thousand). I’m feeling a little more optimistic that I can get a car and my job’s not going to disappear in the next six months or a year or so.” So he went out and bought a new car under the cash for clunkers program. One would think that if an individual thought the stock market were going to perform so splendidly, he would put his money into stocks, not a new car. Admittedly, both Mr. Dunn and Mr. Weiskirch needed new cars; their formerly current vehicles were old, and Mr. Dunn’s pickup had 300,000 miles on the clock. (doubtless one of those “pieces of junk” that the Big 3 have been foisting on the American people) The conditions of their vehicles were reason enough to be looking for a new dream machine. But it looks like a little bit of an incentive, combined with the propensity of Americans to take anything as an excuse to spend money, were the deciding factors in both these gentlemen’s decisions.

That is the ultimate dark cloud in the cash for clunkers program: it exposes the fact that we have not gotten over our compulsion to blow every dollar we have, and then some, with even the slightest of incentives. The consensus of the vast majority of eminent economists, and even of practically thinking people, is that such spending is what we need to get out of our economic quicksand. There probably is something to that argument. But, as I have said ad nauseam in the past, if this economic situation that must not be named has had any beneficent effect, it has been its having increased our savings rate temporarily and perhaps causing Americans to reexamine their attitudes toward money. It looks like the second was an illusion, and that is a shame. An economy can not subsist on wild, irresponsible spending. Savings and capital formation are the keys to long term economic viability. And it looks like Americans will treat the former as a plague to perhaps be endured temporarily and the latter as yet another task that we can outsource to our overseas friends.

About Me

Democrat? Republican? As a guy with no patience for liars, fools, or hypocrites, Mighty Quinn has a healthy disdain for pols of both parties.
A professional investor and lifelong observer of politics, Mark Quinn examines global politics primarily, but not exclusively, from a financial perspective. Mr. Quinn also writes extensively on the politics of Chicago, where he grew up surrounded by pros at the art and science of fleecing the taxpayers and enriching their pals. National pols can only gawk as they aspire to such heights of political chicanery.
In addition to Mighty Quinn on Politics and Money, Quinn also writes The Insightful Pontificator. Formerly the repository his political and financial posts, the Pontificator now features Mr. Quinn’s ruminations on faith and religion. Some have suggested it is written to atone for the often ferocious rants one finds on the Mighty Quinn site.
Mr. Quinn was a featured writer on the Rant Political and Rant Finance sites. He has also written two novels on Chicago politics, The Chairman and The Chairman’s Challenge. Both do for Chicago politics what The Godfather did for the New York Mob.